WASHINGTON, D.C. - The U.S.Supreme Court today affirmed
that a debtor company may not obtain confirmation of a nonconsensual Chapter 11
plan that permits the debtor to sell collateral free and clear of a creditor
bank's lien without permitting the bank to credit-bid at the sale (RadLAX
Gateway Hotel LLC v. Amalgamated Bank, No. 11-166, Chapter 11, U.S. Sup.)(lexis.com subscribers may access Supreme Court briefs for this case).
Justice Antonin Scalia wrote for the court that the
cramdown plan was not "fair and equitable" with respect to the bank's secured
claim pursuant to 11 U.S. Code Section 1129(b)(2)(A)'s exception to the general
rule that a bankruptcy court may confirm a Chapter 11 plan only if each class
of creditors affected by the plan consents.
RadLAX Gateway Hotel LLC and RadLAX Gateway Deck LLC
(collectively, RadLAX) filed for Chapter 11 bankruptcy in the U.S. Bankruptcy
Court for the Northern District of Illinois. Under the plan, RadLAX
sought to auction its assets to the highest bidder and to use the sales
proceeds to repay creditor Amalgamated Bank. The proposed auction
procedures did not permit the bank to bid for the property using the debt it
was owed to offset the purchase price, which is known as
"credit-bidding." Rather, the bank would be required to bid cash.
Amalgamated Bank opposed RadLAX's Chapter 11
reorganization plan on grounds that it was not fair and equitable to secured
creditors.The Bankruptcy Court ruled that the planwas unconfirmable under
Section 1129(b)(2)(A), and a panel of the Seventh Circuit U.S. Court of Appeals
affirmed the Bankruptcy Court's ruling. RadLAX filed a petition for a
writ of certiorari on Aug. 5.
In affirming, the Supreme Court ruled that the cramdown
plan did not satisfy any of three requirements necessary for such a plan to be
"fair and equitable" with respect to the nonconsenting creditor's claim. The
plan did not satisfy Section 1129(b)(2)(A)(ii) because clause (ii) expressly
forecloses the possibility of a sale without credit-bidding. Moreover,
the plan did not satisfy Section 1129(b)(2)(A)(iii), which provides "for the
realization by [the secured creditors] of the indubitable equivalent of [their
Although clause (iii) does not expressly foreclose the possibility
of a sale without credit-bidding, it is not satisfied by providing the bank
with the "indubitable equivalent" of its secured claim in the form of cash
generated by the auction, the court concluded.
Justice Scaliawrotethat a "reading of §1129(b)(2)(A)-under
which clause (iii) permits precisely what clause (ii) proscribes-[is]
hyperliteral and contrary to common sense," relying on the canon of statutory
interpretation that "the specific governs the general."
"Here, clause (ii) is a detailed provision that spells
out the requirements for selling collateral free of liens, while clause (iii)
is a broadly worded provision that says nothing about such a sale. The
general/specific canon explains that the 'general language' of clause (iii),
'although broad enough to include it, will not be held to apply to a matter
specifically dealt with' in clause (ii)," Justice Scalia wrote.
The court rejected RadLAX's argument that clause (iii) is
the general rule and that clauses (i) and (ii) establish safe harbors.
"[N]othing in the generalized statutory purpose of
protecting secured creditors can overcome the specific manner of that
protection which the text of §1129(b)(2)(A) contains," Justice Scalia wrote.
All of the justices joined in the opinion, except Justice
Anthony Kennedy, who took no part in the decision.
RadLAX is represented by David Neff, Brian A. Audette and
Eric E. Walker of Perkins Coie in Chicago.
Amalgamated is represented by Adam A. Lewis of Morrison & Foerster in San
Francisco, Norman S. Rosenbaum of the firm's New York office, John W. Costello
of Edwards Wildman Palmer in Chicago and Deanne E. Maynard, Brian R. Matsui and
Marc A. Hearron of Morrison & Foerster in Washington.
[Editor's Note: The opinion
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